Please take a moment and register for our member’s only webinar, August 2024 Outlook and Update on Wednesday July 31, 2024, at 4:00 PM EDT (change in time due to FOMC Meeting) here:

 

https://attendee.gotowebinar.com/register/6243804818049345632   

 

Please join us for an Almanac Investor Member’s Only discussion of recent market action with time for Q & A at the end. Jeff and Chris will cover their outlook for August, review the Tactical Seasonal Switching Strategy ETF, Sector Rotation ETF, and Stock Portfolio holdings and trades. We will also share our assessments of the Fed, inflation, NASDAQ’s “Worst Months,” the election as well as relevant updates to seasonals now in play.

 

If you are unable to attend the live event, please still register. Within a day of completion, we will send out an email with links to access the recording and the slides to everyone that registers.

 

After registering, you will receive a confirmation email containing information about joining the webinar and a reminder message.

 

 

7/25/2024: Dow 39935.07 | S&P 5399.22 | NASDAQ 17181.72 | Russell 2K 2222.98 | NYSE 18344.46 | Value Line Arith 10534.85

 

Seasonal: Neutral. August is the worst DJIA and second worst S&P 500, NASDAQ, Russell 1000, and Russell 2000 month over the last 36 years, 1988-2023, but in election years August has been stronger. Election-year August ranks #4 DJIA, #5 S&P 500, #1 NASDAQ, and #2 Russell 2000. Average election year gains range from 1.1% by DJIA to 3.5% from Russell 2000.

 

Fundamental: Soft. Today’s advance estimate of Q2 GDP did accelerate to 2.8% with a pickup in consumer spending and inventories, but also a downturn in residential investment. Inflation is slowly cooling but is still stubbornly above the Fed’s stated 2% target. Corporate earnings have been mixed and AI investment is eating into bottom line profits. Unemployment continues to tick higher and at 4.1% is at its highest level since December 2021. 

 

Technical: In retreat. After surging to new highs in the first half of July, DJIA, S&P 500 and NASDAQ have come under pressure. What began as a rotation out of tech and into anything else, especially small caps and the Russell 2000, has manifested into a pullback from recent highs ranging from –3.3% by DJIA to –7.9% for NASDAQ. S&P 500 and NASDAQ are below their respective 50-day moving averages. DJIA is closing in on its 50-day moving average while Russell 2000 continues to hold onto the majority of its recent gains. Levels to watch are DJIA 39000, S&P 5390/5265, and NASDAQ 17000/16500.

 

Monetary: 5.25 – 5.50%. Next week the FOMC will meet again, but no interest rate change is expected. Based upon the CMEGroup’s FedWatch Tool we will all need to wait until their September 18, meeting for an interest rate cut as the odds of a July cut are currently less than 10%. It is hard to see how much, if any, boost an 0.25% reduction in interest rates will produce. It is also challenging to see an aggressive rate cut cycle while inflation is still stubbornly above the Fed’s 2% stated target.

 

Sentiment: Euphoric. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 64.2%. Correction advisors are at 20.9% while Bearish advisors numbered just 14.9% as of their July 24 release. The spread between bulls and bears now exceeds what is it was in March. A cautious stance is warranted at this time as better opportunities may be had later this year.

 

Biden out. Other than the biggest one-day drop since 2022, the biggest news this week has been that President Biden has dropped out of the race. Leaving former President Trump running against current Vice President Harris for president this November. For a New York minute there was a chance for an open democratic convention, but after President Biden endorsed Kamala Harris most other potential candidates and party bigwigs followed suit, Ms. Harris is the presumptive Democratic Party nominee for president this year. All that remains is what appears like a rubberstamp vote by the delegates.

 

This of course brings into play a potential change in our Sitting President Running election year seasonality analysis. With Biden out it begs the question that the negative implications of our Open Field election scenario would be in play now. The last time we carried the Open Field line in our election seasonal pattern chart was in the February Outlook (it’s also on page 11 of the 2024 Almanac). When it became apparent that Biden was running, we felt it was irrelevant and removed it from the chart moving forward.

 

We have gleaned all the Open Field elections and there is no comparable year. 2024 is an unprecedented year. In prior Open Field election years there were unknowns running for president. For example, in 2016 Trump was unknown as a politician and Hillary Clinton, while she was First Lady, a U.S. Senator and Secretary of State she never campaigned or ran for president. In our humble opinion, even with Biden out, 2024 is not an Open Field election. What we have now are two known entities. Donald Trump is a former president running for a second term and Kamala Harris is a sitting vice president who campaigned for the highest office in the land last election before dropping out in December 2019.

 

It’s not trading like it either. We are in the midst of the correction, but the market is down only 3-9% across the major averages and we are still up substantially for the year and significantly above the comparable election year seasonal patterns. This appears to be the mean reversion correction from a very overbought condition we have been expecting. There is no comparison from our perspective except the straight election year scenario. As of now the market is still way above average election year gains.

 

In the updated election year seasonal chart below, we have stripped out all the other lines. The players may have changed but the election year pattern remains the same. The S&P is currently down 4.7% from its recent high which is steeper than the average second half of July election year pullback, but the timing is similar. From here we expect volatility to remain more elevated than it has most of the year, rallying in August, then retreating again ahead of the election into late October followed by a November-December upside move to new highs. 

 

 

 

After struggling for the better part of the past four years the small caps have rallied sharply this month. All year long the Russell 2000 languished, oscillating between positive and negative until jumping 11.5% higher over five trading days from July 10-16. Clearly the small caps are rallying on the long-awaited beginning of the Fed easing cycle with it all but guaranteed the Fed will begin cutting rates at their September meeting. 

 

However, the Russell 2000 election year pattern chart below shows a rather pronounced rally from late July into mid-September that does not appear on the All Years seasonal pattern on page 46 of the 2024 Almanac. Upbeat economic readings have juiced this election move for the small caps. This Russell 2000 move is an encouraging sign for the economy and a bullish indication for small caps and the market as a whole for the year. The September-October pullback lines up with the S&P’s above.

 

 

 

The notoriously weak second half of July is delivering the mean reversion correction we warned you about. How far it goes remains to be seen. As of today’s close, both S&P 500 and NASDAQ have fallen below their pink line 50-day moving averages. Both indexes touched near term support at their intraday lows today near S&P 5390 and NASDAQ 17000. If these levels fail to hold it looks like the March intraday highs around S&P 5265 and NASDAQ 16500 are the next near-term levels of support. This equates to a 7.1% correction for S&P and 11.5% for NASDAQ. Keep your eyes on these levels.

 

 

 

 

Despite all the upheaval in the political arena and the tech selloff, the bull market is still intact. Election year forces have been boosted by the AI-Tech Boom and the economic soft-landing scenario all year long. After this rally respite and the usual August-October volatility, we expect the bull to hit new highs near yearend. Today’s upside surprise GDP reading and the tame quarterly PCE inflation reading that’s contained in this GDP Q2 Advance Estimate underscores the resilient economy and that a September Fed rate cut is cued up.

 

Our bullish election forecast remains on track, but we do expect some volatility over the next few months, both upside and downside. So, strap in as this unique election year evolves. Our strategy has us positioned well. Stick to the system and be patient. We expect a better buying opportunity later in Q3 or October just ahead of the election.

 

 

Absent the benefits of tech-heavy weighting, DJIA got off to a rather sluggish start in July. But that changed quickly on July 11, when CPI came in cooler than expected and the odds of a September rate cut jumped. The ensuing rotation out of tech into basically everything else pushed DJIA to new all-time closing highs (1) above 41,000. Similar to the first time DJIA closed above 40,000 in May, celebrations were short-lived with DJIA briskly retreating. As of the close on July 24, both the faster and slower moving MACD indicators applied to DJIA (2) were negative, confirming the rapid loss of positive momentum.

 

 

Last week’s flight from tech lifted DJIA to its third straight weekly gain (3) and resulted in the worst weekly losses for S&P 500 (4) and NASDAQ (5) since mid-April. Prior to last week’s tech retreat, NASDAQ had logged six straight weekly gains and a streak of 11 weekly gains in 12 weeks. S&P 500 was nearly as strong except for one additional weekly loss. Despite recent weakness, DJIA has also extended its streak without a Down Friday/Down Monday (DF/DM) another four weeks to 14. To find a streak equal to or longer you have to go back to early 2021 during the height of the last bull market.

 

Aside from some solid numbers during the week ending July 12, market breadth remains a concern with NYSE Weekly Advancers barely outnumbering Weekly Decliners (6) in numerous, recent advancing weeks. AI enthusiasm fueled concentrated market gains, but now that earnings have exposed the sizable costs associated with rolling out AI and the likelihood that investors may have to wait longer than previously thought to see a return on the investment, other sectors of the market may look more attractive. In the near term, market volatility has returned and could linger through the balance of the “Worst Months.”

 

Somewhat consistent with the theme of rotation, Weekly New Highs spiked to their highest level since June 2021, last week while Weekly New Lows dropped to the lowest level since last December (7). If the volatility of last week and this week has just been about rotation into sectors and stocks that stand to benefit from anticipated interest rate cuts, then we should see similar numbers for New Highs and Lows this week. If that does not materialize, then the market could be in the anticipated seasonal pullback.

 

Over the past four weeks the 30-year Treasury bond yield has been essentially unchanged (8). The market may prefer falling interest rates, but unchanged did not seem to hurt either. Tepid Q1 GDP appears to have helped cool inflation modestly while today’s advance estimate of Q2 GDP was 2.8%, which is neither too hot nor too cold. The economy does appear to be heading toward a soft landing.

 

 

Unlike earlier in the week, today’s declines were broad based. DJIA, S&P 500, NASDAQ, Russell 2000, gold, crude oil, and bitcoin all declined. During the decline the CBOE Volatility index (VIX) spiked over 16 to its highest level since early May. It remains to be seen if this is the official start of the weakest part of the “Worst Months,” which historically begins shortly after mid-July and lasts through September. What can be said with a fair degree of certainty, just after mid-July, now has historically been the time of the year when volatility, measured by VIX, has begun to increase and the market has struggled.

 

 

In the above chart, weekly bars for VIX appear in the top pane and VIX’s historical seasonal pattern is graphed in the lower pane. The horizontal blue line in the upper pane is set at VIX’s close today at 15.93. Looking at VIX’s seasonal pattern, the black arrow highlights the historical trend in VIX from around mid-July low until a peak around mid-October. If VIX remains elevated, the summer rally may have come to an early end.

 

 

Also, of concern is how closely the market has been tracking the recent 21-year seasonal pattern for July. In the above chart the familiar 21-year patterns appear as solid lines and use the left vertical axis for scale. July 2024, through today’s close (July 18), are plotted as dashed lines and use the right vertical axis for scale. The magnitude of July’s first half gains this year has towered above the recent 21-year pattern, but the trend has been nearly spot-on. July’s peak may have occurred a day or two ahead of schedule depending on the index. Based upon the recent 21-year trend, the balance of July could be choppy to sideways.

 

Election years have historically been bullish with above average performance in June, July, and August, but as we pointed out in the July Outlook, 2024 appears to have gotten well ahead of average historical performance and is likely due for some mean reversion. Today may have been the start.

 

 

Over the past five weeks through yesterday’s close (July 17), S&P 500 rose 3.1% while Russell 2000 jumped 8.9% higher. Over the same period the entire stock portfolio advanced 1.8% excluding dividends, interest on cash, and any trading fees. Overall portfolio performance was held down by a sizable cash balance. This balance is the result of market forces and our seasonal overlay applied to the portfolio. We do not target a specific cash percentage in the portfolio. Digging deeper into the portfolio, Small-Caps performed the best, up 9.9% on average. Mid-Caps followed, advancing 6.7% and finally Large-Caps were up a modest 1.3%.

 

The surge in the Russell 2000 can be attributed to the increasing odds of a Fed rate cut and their valuations relative to many large- and mega-cap stocks. We suspect this nascent small-cap rally during a historically weak seasonal period for small-caps (page 114 STA 2024) could struggle to maintain momentum in the near-term. The widely anticipated 0.25% reduction in interest rates will not hurt, but at the same time it is not likely to help small caps all that much either as the Fed funds rate will still be over 5%. Even if interest rates were to decline, inflation, wage pressure and regulation headwinds will still remain.

 

Portfolio standouts over the past month include Super Micro Computer (SMCI), Mama’s Creations (MAMA), and AT&T (T). SMCI, the largest holding in the portfolio by valuation, rebounded to post a gain compared to last month’s update price. SMCI appears to be settling down, but still remains quite volatile trading in a wide range between around $700 and $900 over the past three months. We do not expect this trading actions to stop soon as reality has lofty earnings expectations to meet. SMCI is on Hold.

 

MAMA continues to shine and was recently added to the Russell 2000 and 3000 indexes. There is little doubt this has created additional demand for MAMA shares from the ETFs that track the Russell 2000 and 3000. Provided MAMA continues to benefit from its relationship with Costco, additional upside remains likely, but further gains could be delayed until after the “Worst Months” come to an end. Hold MAMA.

 

The oldest holding in the portfolio, and the only position in the red (when dividends are excluded), T is actually having a fair year for the first time in many. As of yesterday’s close, T was up 14.2% year-to-date. It was originally purchased for its dividend yield and T still remains attractive based upon this metric. Should the Fed begin cutting interest rates, T’s dividend could attract more buyers. Continue to Hold T.

 

All remaining positions not mentioned above are on Hold. Please see table below for updated stop losses.

 

 

Agriculture made August a great stock market month in the first half of the Twentieth Century. It was the best DJIA month from 1901 to 1951. Now it is the worst DJIA and second worst S&P 500, NASDAQ, Russell 1000, and Russell 2000 month over the last 36 years, 1988-2023 with average performance ranging from 0.1% by NASDAQ to a –0.9% loss by DJIA. In 2022, DJIA, S&P 500, NASDAQ, and Russell 1000 all declined over 4% in August and in 2023 they declined 1.8% or more. 

 

Contributing to this poor performance since 1988; the second shortest bear market in history (45 days) caused by turmoil in Russia, the Asian currency crisis and the Long-Term Capital Management hedge fund debacle ending August 31, 1998, with the DJIA shedding 6.4% that day. DJIA dropped 1344.22 points for the month, off 15.1%—which is the second worst monthly percentage DJIA loss since 1950. Saddam Hussein triggered a 10.0% slide in August 1990. The best DJIA gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Sizeable losses in 2010, 2011, 2013, 2015 and 2022 of over 4% by DJIA have widened its August average decline.

 

 

However, in election years since 1950, Augusts’ rankings improve: #4 DJIA, #5 S&P 500, #1 NASDAQ (since 1971), #1 Russell 1000 and #2 Russell 2000 (since 1979). Average election year performance ranges from a modest 1.1% by DJIA to a solid 3.5% from Russell 2000. The last election year with sizeable across the board August losses was 1992. In 2004 and 2016, August was mixed. Some of these historical August gains may have been pulled forward already this year.

 

 

Historically, the first eight or nine trading days of the month have exhibited weakness while mid- and late month has been somewhat better. This pattern does not exist in election years. In election years, August has opened strongly with gains accumulating through the seventh trading day before a brief bout of mild weakness followed by additional gains through the end of the month. With fewer years of data, August election-year strength in recent years is more pronounced by NASDAQ, Russell 1000, and Russell 2000. One likely reason for such a strong shift in August performance in election years is the fact that the top candidates are known and confirmed.

 

On Monday of monthly options expiration DJIA has been up 19 of the last 29 years with four days up more than 1%. Monthly expiration Friday has been mixed recently with 18 declines in 34 years. More recently, DJIA has been up in five of the last six years after declining in seven of the previous eight. In monthly expiration week, DJIA is down 21 times in 34 years since 1990, with some sizable losses; –2.6% in 1990, –2.3% in 1992, –4.2% in 1997, –4.0% in 2011, –2.2% in 2013, –5.8% in 2015, and –2.2% in 2023. The week after expiration is stronger, DJIA up 20 of the last 33.

 

 

 

In case you missed the member’s only webinar last Wednesday (July 3), the slides and video recording are available here (or copy and paste in a new browser window: https://www.stocktradersalmanac.com/LandingPages/webinar-archive.aspx). In the webinar we reviewed our July outlook, key seasonal pattern charts that we have been tracking throughout the year, current GDP and inflation trends, Fed interest rate expectations, the end of NASDAQ’s Best Eight Months, NASDAQ’s Midyear Rally and what we expect during the balance of the “Worst Months.” We also took questions from attendees. One question that came up then and a few times via email since was about the impact of Fed rate cuts on the market. Today’s better than expected CPI report has greatly improved the odds of a Fed rate cut in September, making this topic even more relevant now.

 

Changes in Fed Funds rate is a topic we explored in May 2022 as the Fed began increasing interest rates. Here is what we found then, updated with 2022 and 2023. Using Federal Funds Effective Rate data, available at St. Louis Fed’s FRED database, since July 1954, we compiled the following charts. The first two charts of the S&P 500 and NASDAQ offer a quick comparison of a few basic scenarios. Based upon the annual change in Fed Funds Effective Rate, data was grouped into three categories: Higher, Lower, and No Change (NC). For NC, a range of plus/minus 0.2% was used. The All line represents all years in the data set.

 

 

On average, it would appear as though changes in Fed Funds Rate generally did not have a significant effect on the S&P 500 or NASDAQ. Years where Fed Funds Rate did not change or changed less than +/- 0.2%, historically performed the best. On average S&P 500 averaged just under 12% for the full year while NASDAQ averaged over 25%. The most recent year to fall into this category was 2021. 

 

Higher Years and Lower Years failed to show any substantial deviation versus All Years. This was a somewhat surprising result considering the biggest increase in one-year rates was 7.23% (from 14.77% at the end of 1979 to 22.00% at the end of 1980). In 1980 the S&P 500 gained 25.8% and NASDAQ rose 33.9%. The largest one-year decrease in rates was 8.87% (from 22.00% at the end of 1980 to 13.13% at the end of 1981). In 1981, S&P 500 declined 9.7% and NASDAQ fell 3.2%.

 

 

In these next two charts we expanded the number of categories that a given year could fall into based upon the magnitude and direction of the change of Fed Funds Rate. With this approach one group easily stands out while the rest still exhibited relatively subtle changes. Years in which Fed Funds Rate was cut by 2% or more, were a disaster on average. Which is consistent with current Fed practice of rapidly lowering Fed Funds Rate in response to adverse economic conditions. These years were 1974, 1981, 1987, 1990, 2001, 2007 and 2008. Prior to the Covid-19 Pandemic, Fed Funds had declined in 2019 and was only cut 1.46% in 2020 (1.55% at yearend 2019 to 0.09% at yearend 2020).

 

NASDAQ appears to perform best when rates are unchanged or modestly lower (no more than a 2% drop in a year). S&P 500 also appears to favor unchanged to modestly lower rates but appears to be more resilient when annual increases were less than 2%. Interest rates do play a role in the market’s overall performance, but it is not the only factor. Employment, overall economic growth, inflation, and taxes all impact corporate earnings. Sentiment and momentum can also drive prices to levels (up and down) that may appear to have little to no connection to reality. Barring an external trigger or major economic calamity, the Fed appears to be nearly ready to embark upon slowly returning rates to a neutral range. Based upon past occurrences, future modest cuts in rates are likely to keep the bull market alive and well. However, this does not eliminate the possibility of some near-term seasonal weakness during the “Worst Months.”

 

 

Three new sector seasonalities begin in the month of July. First up is a bearish seasonality in Transports which typically begins in the middle of July and lasts until the middle of October. This seasonality is based upon the Dow Jones Transportation index (DJT). Over the last 10- and 25-year time periods DJT has declined 1.23% and 6.25% on average during this bearish period. Industrials also exhibit similar weakness to the transports sector over nearly the same timeframe.

 

iShares Transportation (IYT) is a top choice to establish a short position in to take advantage of seasonal weakness in the transport sector. IYT has over $700 million in assets, has traded an average of over 300,000 shares per day over the past 30 days and has a reasonable 0.40% expense ratio. IYT’s top five holdings include: Uber, Union Pacific, United Parcel Service, FedEx and Old Dominion Freight.

 

 

IYT has been trending lower since late March flattening its 200-day moving average and pulling its 50-day moving average lower. IYT’s late May low appears to have been tested in mid-June, but shares have remained rangebound. Today’s sizeable gain by Uber on news that Tesla is delaying its Robotaxi is not likely going to stick as Uber still faces numerous other headwinds. IYT could be shorted on a breakdown below $63.23. If shorted, consider an initial stop loss at $65.50.

 

SPDR Industrials (XLI) will be our choice to establish a short position to trade seasonal weakness in the industrial sector. XLI has over $18 billion in assets and frequently has 5 to 10 million shares changing hands daily. Its expense ratio of 0.09% is very reasonable. Top five holdings of XLI include: General Electric, Caterpillar, Uber, Honeywell, and Union Pacific.

 

 

XLI’s chart and technical indicators do not differ much from the chart of IYT. XLI even experienced similar softness since late March, just to a lessor magnitude. XLI could be shorted on a breakdown below $119.62. If shorted, set an initial stop loss at $123.50, this level is just below projected monthly resistance (red dashed line). Please note that the (S) after IYT and XLI in the portfolio table below denotes a short trade.

 

July’s final seasonality is for gold & silver mining stocks. This seasonality is based upon strength in the Philadelphia Gold & Silver index that typically begins in late July and lasts until late December. Over the past 10 years this trade has struggled, but more recently in the last 5 years it has averaged 7.35%. With September rate cut odds rising on today’s better than expected CPI report, gold, silver, and their miners are all solidly higher today.

 

VanEck Gold Miners (GDX) is our preferred ETF to take advantage of seasonal strength in gold and silver miners. As of the close on July 10, GDX had over $14 billion in assets with an expense ratio of 0.51%. Top five holdings of XLI include: Newmont, Agnico Eagle Mines, Barrick Gold, Wheaton Precious Metals, and Franco-Nevada.

 

 

After spending much of June consolidating earlier gains, GDX broke out to new highs today. Stochastic, relative strength and MACD indicators are all positive and trending higher. GDX can be considered on dips below $37.00. If purchased, set an initial stop loss at $32.70 and an auto sell at $48.28.

 

 

We will also look to establish a position in SPDR Gold (GLD). Like the miners, physical gold also enjoyed solid gains today and GLD is on the verge of breaking out to a new high. After consolidating throughout June, GLD has reclaimed its 50-day moving average and appears to be regaining upside momentum with Stochastic, relative strength, and MACD indicators positive and trending higher. GLD can be considered on a dip below $220.10. If purchased, consider a stop loss at $208.39.

 

 

Per our Seasonal MACD Sell for NASDAQ emailed after the close on June 25, SPDR Consumer Discretionary (XLY) and SPDR Consumer Staples (XLP) positions established last October 5 were closed out of the portfolio on June 26 with gains of 9.0% and 15.4% respectively. Please note, there is still a “Worst Months” position in XLP in the portfolio and it can still be considered on dips below its buy limit.

 

With crude oil back above $80 per barrel and showing signs of strength, we are going to continue to hold SPDR Energy (XLE). Oil’s seasonally bullish period has historically ended in early July. In light of this, we are going to implement a 1% trailing stop loss based upon its daily closing price. Starting with today’s close of $90.25, the stop loss is $89.35. Stop only if XLE closes below this level and update daily should XLE continue to rise.

 

 

 

Per our Seasonal MACD Sell for NASDAQ, Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) were sold and closed out of the portfolio on June 26. QQQ recorded a 30.0% gain since our Seasonal Buy Signal last October. IWM lagged during the Best Months, but still managed a respectable 13.7% gain excluding dividends and any trading fees.

 

With the odds of a rate cut for September improving, TLT, AGG, and BND can be considered on dips below their respective buy limits. Should inflation continue to aggressively cool alongside a softening labor market and economic growth, these ETFs could finally see some upside. However, if that does not transpire, then they could also dip into the red. For tracking purposes, we will add to existing positions should TLT, AGG, or BND trade below their buy limits.

 

SHV and SGOV can still be considered at current levels. Yields on 1- to 6-month Treasury bonds currently remain above 5% which is likely to ensure the yields of SHV and SGOV remain at or above 5% through the “Worst Months.” If you prefer reduced risk and a respectable yield, SHV and SGOV (and similarly constructed ETFs and funds) are reasonable choices to park cash until our next Seasonal Buy Signal later this year.